A few years ago, some of the hottest stocks in the energy sector were the refiners, as high prices pushed production and refining needs. Then along came a huge drop in the price of oil, from over $100 a barrel to the mid $20s. With the huge price drop came some serious selling in the refining group, and a general ho-hum attitude toward the group set in. Combine a massive hurricane, an increase in the price of oil and the widening of crack spreads, and 2018 is looking very bright.
In a new research report from Brad Heffern, the outstanding analyst at RBC who covers the refining stocks, he notes that the general malaise toward the stocks last summer has turned to outright bullishness, and he cites Hurricane Harvey as a catalyst as the storm allowed inventories to move back to more normal levels after years of too much supply. The report noted this:
We are updating our crack spread assumptions to include both wider WTI-Brent crude spreads as well as stronger distillate pricing. As a result, our 2018 earnings-per-share estimates are moving up by 68% on average, while our price targets are increasing by 10%.
Four top refining stocks are rated Outperform at RBC, with one being the firm’s top pick. All make great additions to long-term growth portfolios, especially those looking to add energy-related stocks.
Delek
This small cap refining company could bring some outstanding gains for investors with a more aggressive investing portfolio. Delek U.S. Holdings Inc. (NYSE: DK) is an independent U.S. refiner headquartered in Brentwood, Tennessee, with core operating assets located in Tyler, Texas, and El Dorado, Arkansas.
Delek operates three business units (refining, retail, logistics) but derives more than 70% of its operating income from its refining segment, which has approximately 140 million barrels per day of crude throughput capacity. Delek’s product slate is skewed toward the light end, including motor fuels.
RBC team raised its 2017 estimated earnings to $0.85 per share from $0.15, and the 2018 numbers go from $1.78 to a stunning $3.84 a share.
Delek investors receive a very solid 2.3% dividend. The RBC price target was raised to $35 from $32, and the Wall Street consensus target is $28.33. The stock closed on Wednesday at $25.66.
HollyFrontier
This is another smaller cap company that the analysts feel comfortable about now. HollyFrontier Corp. (NYSE: HFC) is an independent refiner that produces various refined products. It owns and operates five refineries in Artesia, New Mexico; Woods Cross, Utah; Tulsa, Oklahoma; Cheyenne, Wyoming; and El Dorado, Kansas.
In addition, HollyFrontier owns and operates Holly Asphalt, which manufactures and markets asphalt products, and owns a 32% limited partner interest and 2% general partner interest in Holly Energy Partners.
RBC changed its 2017 estimated earnings to $2.32 a share from $1.52, and the 2018 estimate went from $2.47 to a huge $3.74 a share.
HollyFrontier investors receive a 3.66% dividend. The $38 RBC price objective was raised to $42. The consensus target price is just $35.54, and shares closed Wednesday at $36.09.
Marathon Petroleum
This top refiner has been on a nice roll but still trades well below highs posted in late 2015. It also is the top pick at RBC. Marathon Petroleum Corp. (NYSE: MPC) recently was added to the Franchise Picks List, and it has a diversified business that operates through Refining & Marketing, Speedway and Pipeline Transportation segments.
The company owns and operates seven refineries in the Gulf Coast and Midwest regions of the United States, which refine crude oil and other feedstocks, and it distributes refined products through barges, terminals and trucks, as well as purchases ethanol and refined products for resale.
The company announced in January its plans to significantly accelerate its dropdown of assets with an estimated $1.4 billion of master limited partnership eligible annual earnings before interest, taxes, depreciation and amortization being transferred to MPLX. The analysts noted in a report:
The company decided recently not to spin off its Speedway business which has 2,730 locations, spread across 21 states. In 2017, Marathon plans to invest $380 million into Speedway, by building new stores and remodeling others, the company’s officials have said.
RBC analysts raised their 2017 estimated earnings to $3.44 per share from $2.04. The full-year 2018 estimate rose from $3.80 to a massive $5.54 a share.
Marathon shareholders receive a 2.82% dividend. RBC raised its $71 price target to $74, well above the consensus target of $64.78. The stock closed Wednesday’s trading at $56.75.
Valero Energy
Only 17% of institutional funds currently own this Wall Street and RBC favorite. Valero Energy Corp. (NYSE: VLO) is the largest independent petroleum refining and marketing company in the United States. It is based out of San Antonio, owns 13 refineries in the United States, Canada and Europe, and has total throughput capacity of around 2.5 million barrels per day.
RBC analysts lifted their 2017 estimated earnings to $5.88 per share from $3.49, while the 2018 estimate went from $4.29 to a gigantic $8.18, an increase of a stunning 91%.
Investors are paid a 3.61% dividend. The RBC price target is a whopping $88, up from a prior $77. The consensus target is $79.65, and shares closed Wednesday at $77.62.
Four stocks where the RBC analysts are raising earnings estimates to stunning levels, and while there is always the chance for them to be off, anything close to the numbers posted for next year will be huge for the four companies.
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